Here's how a stock market sounds when the bubble bursts …

Here's how a stock market sounds when the bubble bursts …

Bloomberg

Few people believe the U.S. market is in a bubble. After all, we’ve made all-time highs, numerous analysts have appeared on TV stating the bull market is just getting started, and according to sentiment indicators, complacency is at historic levels. Unfortunately, many investors believe the Fed will save the market, and that every dip is a buying opportunity.

When almost no one believes the market is dangerous, that’s when it is most dangerous.

Many people incorrectly believe that market bubbles grow quickly and burst. A true bubble is a prolonged period of excess. The longer it rises and the more the pressure builds, the bigger the pop.

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To gain more insight about bubbles, I recently interviewed stock-market expert Mark D. Cook, with whom I am co-author of “Prepare Now and Survive the Coming Bear Market.”

Cook has been warning of a bear market for several months. “The bull has gone out of this market,” Cook says. “We haven’t even moved 2% in 2015. If it’s a strong bull market, there would be enthusiastic rallies and strong volume. Instead, the volume is sick and the rallies are tepid. The only thing that hasn’t fallen into the abyss is prices.”

If Cook is right (and I believe he is), although the market could still go higher, it is dangerous to be 100% invested. Although few want to believe there could be a severe correction or crash, you should be aware of what could happen. Keep in mind that all three of the following scenarios end the same way: A sharp dive over the cliff. The difference is how they get there.

Cook describes three scenarios of what happens when the market is in a bubble:

1. Head-fakes and lost faith

In this scenario, the bubble makes an all-time high but reverses. “The market will slowly make a higher-high, but just by a little bit,” Cook says. “The volume isn’t there, nor is there much enthusiasm. Investors are not overly concerned. And then, the market starts to fall, but rather slowly.”

Even though the market keeps going down and is damaged, investors are hopeful it will bounce back quickly, but it doesn’t. It may take three steps down and then one step up. For investors, it’s excruciating because they are hopeful rallies will bring the market back to its previous high, which doesn’t come. Because the bull market is so mature (i.e. over six years old), it cannot withstand adversity, and is permanently damaged.

2. ‘Black swan’

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Here's how a stock market sounds when the bubble bursts …

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